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OECD/ADBI 7th Round Table on OECD/ADBI 7th Round Table on Capital Market Reform in AsiaCapital Market Reform in Asia
2727--28 October 200528 October 2005ADB Institute, Tokyo, JapanADB Institute, Tokyo, Japan
SESSION 4: DEVELOPMENTS IN VENTURE CAPITAL AND PRIVATE
EQUITY SINCE THE END OF ‘TECH BUBBLE’
Professor Dosoung Choi, President, Korea
Securities Research Institute
KSRI InsightKSRI Insight
Venture Capital and Venture Capital and
Private Equity in KoreaPrivate Equity in Korea
2005. 10.Dosoung Choi
President, KSRI
2
II. Venture Capital Industry in Korea
IV. New Measures to Promote Venture Capital
Ⅰ. Innovative Businesses and Venture Capital
-- Contents Contents --
III. Private Equity in Korea
4
ⅠⅠ. Introduction. Introduction
The future of Korean Economy is in technology-
based firms and innovative businesses.
Technology-based firms are characterized by
High risk - high return
Financial structure should reflect risk-taking capacity
– A bank-based financial system is not appropriate for these
industries
– Need to move toward a market-based financial system
=> A well-functioning venture capital market/industry is a
critical component of the market-based financial system.
5
ⅠⅠ. Stock Market Development Index. Stock Market Development Index
Stock Market Size of OECD Countries in 2001
(World Development Indicators 2003)
6
ⅠⅠ. Growth Race. Growth Race
Market1.76 1.45 33+24Biotechnology
Market2.961.22Mean
Market3.45 0.53 31+32Next Generation Batteries
Market7.85 6.47 64+72Digital Content/Software Solutions
Market2.55 1.97 33+64Next Generation Mobile Devices
Market1.42 -0.93 30+32Next Generation Semi-Conductors
Market1.12 -0.92 30+34Smart Cars
Market3.18 0.69 29+31+32Robotics
Market1.43 -0.22 26+30+32Displays
Market3.84 1.94 32+64Digital TV/Broadcasting
Market/BankMarket-basedBank-basedISICIndustry
Annual Growth Rates of Real Value Added (%)
Among 20 countries from the OECD, 1991-2001Source: OECD STAN database, World Bank WDI
Growth of Select Industries
7
ⅠⅠ. Venture Capital Market of OECD Countries. Venture Capital Market of OECD Countries
The relative scale of the venture capital market is 7th among the
OECD counties.Investment in venture capital as a percentage of GDP
of OECD countries, 1998-2001
Source: OECD, Science, Technology and Industry Scoreboard, 2003
8
2.3425710,9880.744.5605.22003
2.4625810,4810.754.1546.92002
2.5325610,1010.844.0482.02001
2.322289,8170.784.0511.82000
A/BVC Source (B)GDP(A)A/BVC Source (B)GDP(A)
US (Billion $, %)KOREA (Billion $, %)
The scale of venture capital : KOREA VS. U.S.
ⅠⅠ. . Comparison of Venture Capital Sources of Comparison of Venture Capital Sources of Korea and the U.S.Korea and the U.S.
In 2003, the size of venture capital source relative to
GDP is 0.74% (US : 2.34%).
9
ⅠⅠ. Venture Companies in Korea. Venture Companies in Korea
2,042
4,934
8,798
11,392
8,778
7,702
8,776
1998 1999 2000 2001 2002 2003 2004
NUMBER OF VENTURE COMPANIES
Source : Small and Medium Business Administration (SMBA)
Since the financial crisis in 1997, the number of venture companies increased steadily, until the bust of the tech-bubble in 2001-2.
After 2003, the number of venture companies has been rising again.
10
ⅠⅠ. Venture Companies in Korea. Venture Companies in Korea
About 35% of Venture companies are in Software, Energy, and Bio Technologies industries.
Around 68% of Venture companies shows the amount of sales below $5milliion
* IT venture companies account for 43.8%
IT Services*
Software*
Manufacturing
Energy, Bio Technologies
Machinery
Broadcasting,
Communication*
Computer,
Semiconductor,
Electronic
component*
Others
18.0%
19.1%
15.9%13.9%
10.8%
10.6%
3.3% 8.4%Over 10,000
Less than KRW
100 million
100~500
500~
1,0001,000 ~
5,000
5,000~
10,000
12.0%
15.5%
20.4%20.2%
13.6%
18.3%
VENTURE COMPANIES BY INDUSTRY, 2004
100%=7,609 companies
VENTURE COMPANIES BY SALES, 2004
100%=7,609 companies
Source : 2004 Venture Companies Survey, SMBA / KOVA
12
DEVELOPMENT OF the VENTURE CAPITAL INSTURY IN KOREA
II. VENTURE CAPITAL INDUSTRYII. VENTURE CAPITAL INDUSTRY
• The number of VCs
decreased to 105 in
2004
• The VC fund and VC
investment significantly
contracted
• Only 30~40 VCs are
active
• VCs proliferated and the
number of VCs peaked
at 147 in 2000
• 325 venture capital
funds (VC funds) were
launched in 2000
• VCs invested KRW 2
trillion in 2000
• Support for Small and
Medium Enterprise
Establishment Act
enacted in 1986
• 12 venture capital
companies (VCs) were
founded in 1986 and the number of VCs
increased to 72 in 1998
• Small and Medium
Business Administration
(SMBA) was established
in 1996
• Act on Special Measures
for the Promotion of Venture Businesses
enacted in 1997
• Korea Technology
Advancing Corporation
(KTAC) founded by
Korea Institute Science
and Technology (KIST) in 1974
• Three more New Technology Finance
Companies established
under Financial
Assistance to New
Technology Businesses Act (1986)
Overshooting Phase(1998~2000)
Growth Phase(1986~1998)
Initial Phrase(1974~1986)
Consolidation Phase(2001~)
Source : llshin Analysis
13
Venture capital system in Korea
A venture capital company (VC) acts as a general partner
and takes a form of a corporation with a minimum paid-in
capital requirement
A venture capital fund (VC fund) is organized in the form of
a limited partnership and managed by a VC
II. VENTURE CAPITAL INDUSTRY II. VENTURE CAPITAL INDUSTRY : : Venture capital systemVenture capital system
14
II. VENTURE CAPITAL INDUSTRYII. VENTURE CAPITAL INDUSTRY
93
149
325
395
410
428
422
1998
1999
2000
2002
2001
2003
2004
72
87
147
145
128
117
105
Number of
Venture Capital
Companies
Number of
Venture Capital
Funds
ESTABLISHEMENT OF VENTURE CAPITAL COMPANIES AND VENTURE CAPITAL FUNDS, 1998~2004
Source : SMBA
15
Aggregate fund size is 5,991 KRW billion (5.23$billion) in 2004 The major limited partner of venture capital funds is the government (31.1%)
II. VENTURE CAPITAL INDUSTRY : II. VENTURE CAPITAL INDUSTRY : Fund RaisingFund Raising
VC
Funds
VCs’Proprietary
Capital
Government
Pensions
Funds*
Others
31.1%
18.8%15.5%
14.4%
14.7%Financial
Institutions
LIMITED PARTNERS OF VC FUNDS
BY TYPE, 2004Total=KRW 3,559 billion
5.5%
Corporates
and Individuals
VCs**
AGGREGATE FUND SIZE, 1998~2004Total=KRW 3,559 billion
*The National Pension Act was revised in 2001 and the National
Pension Corporation started to invest in VC funds in 2002
**Equivalent to general partner contribution to VC funds
2,463
4,1384,525 4,560
3,2022,801
2,432
1998 1999 2000 2001 2002 2003 2004
1,175
1,338
2,338
3,060
3,223
3,4773,559
7,620
6,425 6,2775,991
3,638
5,475
6,863
Source : Korea Venture Capital Association (KVCA)
16
II. VENTURE CAPITAL INDUSTRY : II. VENTURE CAPITAL INDUSTRY : InvestmentInvestment
950.2
2,007.5
889.3
616.7
611.8
563.9
1999
2000
2002
2001
2003
2004
1,901
1,457
1,117
766
615
510
3,035.8
1,484.5
2,869.1
3,032.2
2,737.1
2,563.1
1999
2000
2002
2001
2003
2004
2,743
1,973
3,076
3,083
2,863
2,618
Number of
Investments
Amount KRW
billion
Number of
Investments
Amount KRW
billion
INVESTMENT BY YEAR, 1998~2004 AGGREGATE INVESTMENT BY YEAR, 1998~2004
Source : SMBA
The amount of investment has been falling since 2000In 2004, $0.5 billion was newly investedAggregate investment in 2004 is $2.24 billion
17
Investment by Industry and StageNearly 60% of all the investment are made in information technologies sector
More than 70% are invested in venture companies of the age of 3 years or younger
Retail
1.1%
Information
Technologies
Manufacturing
Environment
0.6%
Entertainment
Bio Technologies
2.3%
Others
1.8%
16.5%
55.7%
21.7%
Less than
3 years
3~7 years
Over
7 years
27.5%55.6%
16.9%
INVESTMENT BY INDUSTRY, 2004
100%=KRW 563.9 billion
Energy0.4%
INVESTMENT BY STAGE, 2004
100%=KRW 563.9 billion
II. VENTURE CAPITAL INDUSTRY : II. VENTURE CAPITAL INDUSTRY : InvestmentInvestment
Source : SMBA
18
The common form of an equity investment has been common
equity.
Recently, VCs started to employ preferred stocks.
The project financing is usually used for financing the
production of films, games, and music, etc.
Equity-linked
Equity
47.8%
Project Financing
26.8%
25.4%
INVESTMENT BY INSTRUMENT, 2004
100%I=KRW 563.9 billion
II. VENTURE CAPITAL INDUSTRY : II. VENTURE CAPITAL INDUSTRY : InvestmentInvestment
Source : SMBA
19
II. VENTURE CAPITAL INDUSTRY : ExitsII. VENTURE CAPITAL INDUSTRY : Exits
KOREA*
US
96.5% 95.9% 93.5% 96.2% 91.3%
2000 2001 2002 2003 2004
3.5% 4.1% 6.5% 3.8%8.7%
142 123 138 131 138
2001 2002 2003 2004
10.5% 7.1% 9.1%
21.8%
89.5% 92.9% 90.9% 78.2%
580 391 339 320 426
2000
45.5%
54.5%
M&A M&A
IPO
IPO
No. of
Exits
No. of
Exits
EXIT BY TYPE, 2000~2004 : Number of Exits
*Based on survey data from 43 VCs
Exit opportunity is by IPO
Source :KVCA; National Venture Capital Association (NVCA)
Most exits in Korea are through IPOs (91.9%, 2004)It takes 9.2 years on average for a venture company to the stage of IPO (2004)
20
Venture Capital Exits in Korea
Inactive M&A Market
– Negative image attached to M&As
– Unfavorable tax treatment on equity swap
– Ceiling on conglomerate’s total shareholdings discourages business groups
from acquiring venture companies
II. VENTURE CAPITAL INDUSTRY : ExitsII. VENTURE CAPITAL INDUSTRY : Exits
KOSDAQ M&A
9%
5%
8%
11%
13%
0%
2%
4%
6%
8%
10%
12%
14%
2000 2001 2002 2003 2004
Venture capital exit through M&A
9
31
21
1111
6
25
22
12
16
22
12
18
26
1
710 10
0
5
10
15
20
25
30
35
2000 2001 2002 2003 2004 2005.6
Merger Acquis itions Spinoffs
21
NA
65
164
98.7
453
1999
11263659NANANANANumber of IPOs of VC-backed
Companies
113759108137117NANANumber of IPOs of Venture
Companies
165271157177231883Number of IPOs
37.131.137.437.451.829.07.97.1Total Market Capitalization*
(KRW trillion)
880890879843721604331359Number of Listed Companies*
2005.42004200320022001200019981997
* As of each year-end
II. VENTURE CAPITAL INDUSTRY : ExitsII. VENTURE CAPITAL INDUSTRY : Exits
KOSDAQ Market in Korea
Source : Korean Stock Dealers Association
23
Private Equity Investment Vehicles
Venture Capital Funds
Vulture Funds
Buyout Funds (PEFs) introduced in 2004
Purpose of PEF legislation
Revitalizing corporate buyout market
Mobilizing domestic investment capital
The aggregate size of PEF is $20 billion in 2005 (until Sep.)
Problems Associated with PEF Activities
Lack of targeted firms
Lack of experts (M&As, valuation, industry analysis, restructuring)
Being over-regulated
Being urged to show short-term results
III. Private Equity in KoreaIII. Private Equity in Korea
24
III. Private Equity in Korea III. Private Equity in Korea
PEFs in Korea
ProcessGeneral PartnerFund Size(Million $)
PEF Name
LP: National PensionFund
H&Q AP Korea385H&Q PEF
LP: Foreign CorporationMacquarie KoreaOpportunities Management
25Macquarie KoreaOpportunities PEF
LP: Foreign CorporationMBK Partners300MBK Partners PEF
LP: National PensionFund
Shinhan Private Equity300Shinhan PEF
LP: 12 FinancialCompanies, 1 Corporation
Vogo Investment501Vogo
LP: 2 Pension Funds,4 Financial Companies
Industrial Bank of Korea/KTBnetwork
120Kiuo Bank-KTB
Investing 100 billion Wons to acquire JinroKorea Development Bank300KDB 1
LP: 2 Pension Funds, 1 Financial Company
Consus Asset Management390Consus 1
LP: KoreanCorporations
Woori Investmentand Securities
49MARS 1
Investment FailureDevonshire Korea30Devonshire
Being LiquidatedWoori Bank210Woori 1
Contracting MOU toacquire Shinwoo
MAPS InvestmentManagement
140MAPS 1 PEF
26
Nurture and strengthen venture capitalNurture and strengthen venture capital
Weaknesses in the structure of VC fund
Severe dependence on Government
– The scale of funds from Institutional investors (including Pension and
financial institutions) is very low
– In case of US, investments from pension funds are over 40
Steady and secure resource of venture capital fund
Expansion of Fund-of Funds investing in Venture Capitals
IVIV. New Measures to Promote Venture Capital. New Measures to Promote Venture Capital
27
Few investments in early-stage venture companiesThe short duration of venture capital companies (5 years)
– For successful exits, VCs focus on firms with the age of 5 years or under
Encouraging VCs to invest in early-stage firmsThe financing proportion of Fund-of Funds for the early-stage firms is raised from 30% to over 40%, depending on management outcome
Policy funds (including KDB loans)-VCs joint fund investing in start-ups
Expand the duration of VCs from 5 years to 7-10 years
IV. New Measures to Promote Venture CapitalIV. New Measures to Promote Venture Capital
28
Enhance management efficiency, transparency, and
reliability
Encourage staged financing to venture companies
Financing rounds are related to significant stages in the development
process and at every stage, new information about the company is
released (Sahlman, 1990).
Reform corporate governance of venture firms
Venture capital may require its appointee to sit on the board of a venture
company
IV. New Measure to Promote Venture CapitalIV. New Measure to Promote Venture Capital
29
Promote Promote M&AsM&As as an alternative means of exitas an alternative means of exit
Market exit opportunities are limited
– About 92% of venture capital exit is through IPOs on Kosdaq market,
which has recently come out of slump
Revitalize KOSDAQ
Only 4% of venture companies(385 among 8776, total number of venture
companies in 2004) are presently listed on Kosdaq
Ease limits on price fluctuation
More tax benefits to listed companies
Alleviate tax burden on venture M&As (tax on unrealized capital gains)
IVIV. New Measure to Promote Venture Capital. New Measure to Promote Venture Capital
30
Promote the Free Board Switch the trading system to “competitive bidding” to enhance liquidity and reliability
Allow tax exemption on capital gains for Free Board stocks
Encourage institutional investors to invest in venture funds and/or venture companies
Promote Venture M&AsEase the legal procedure for M&As of venture companies
Amend the appraisal right provision (the put option is at times overpriced)
Eliminate tax penalties on merging venture companies
IVIV. New Measure to Promote Venture Capital. New Measure to Promote Venture Capital